In Shanghai, charting the future of global finance

Third MIT Sloan finance forum examines interconnected finance systems and China’s role in the world economy

August 5, 2013

Finance professor Robert Merton

More than 200 finance professionals and MIT Sloan alumni gathered in Shanghai last month for a day of discussion on the future of modern finance, the third in a series of forums that bring MIT Sloan faculty around the world for frank discussions about finance and policy.

“[MIT Sloan] has the responsibility to lead and develop what the world needs for finance,” dean David Schmittlein told the audience at the July 19 event. “It’s important for us to develop the concepts and methods that will allow us to develop the complex, sophisticated financial systems that the world needs, with a resilience that the world also needs.”

“The world needs more smart people who understand complex financial systems,” he said. “Not less.” MIT Sloan this year launched the MIT Sloan Center for Finance and Policy.

Sound modern financial systems are built using expert knowledge to interpret vast amounts of data. To contribute to the discussion, MIT Sloan professors Deborah Lucas, Robert Merton, Jun Pan, and Stephen Ross shared their latest research on financial models and systems that address some of the challenges in modern finance.

And MIT Sloan alumni covered a range of topics in two panels. On one, two of China’s top financial professionals discussed the role of finance in emerging markets, while another group discussed ways to lead the financial organizations of the future.

Finance is becoming increasingly important for emerging markets

Shanghai, China’s financial capital and aspiring world financial center, was an apt location to discuss the role of finance in the growth of emerging markets. Leaders in emerging markets are seeking to better manage growth, gathering more knowledge and talent from the financial field than ever before.

“The era when very few Chinese financial professionals were up to date with the latest academic research findings is over,” said Haizhou Huang, managing director and head of the sales and trading department of China International Capital Corporation. There is an “ever-increasing number of Chinese financiers being educated at leading institutions like MIT Sloan,” he said.

Emerging markets are also challenging the post-2008 financial crisis system. Huang pointed out the benefit of China’s lack of heritage in finance, suggesting it gives China “an opportunity to create finance for the future, with a completely new financial system.”

Interconnectedness in finance can be a strength

Increased interconnectivity of global financial markets, a phenomenon of the modern financial system that was widely commented on during the crisis, was a key theme throughout the forum.

Professor Robert Merton, a Nobel laureate, introduced a new approach for analyzing and managing macro financial risks by leveraging the many connections between financial bodies that makes the world of finance so complex.

Merton's goal is to "figure out ways to convey information with vast connections and numbers in a fashion that's useful while trying to understand what's going on." He believes his approach will help guide finance professionals toward asking prescient questions when examining global markets.

Rather than view the complicated interconnectedness of financial systems as problematic, Merton was optimistic.

“The mere observation of growing connectedness is not in itself a suggestion of contagion or systemic risks. It may even be a reflection of the improvements in the global system,” he said.